In mid-July, the EUR/USD was trading at 1.6038 and crude oil was $147 per barrel. Now the economic slowdown has gone global, oil prices have collapsed and the once mighty euro has dropped to 1.40. “How far behind is the ECB on this? And how far behind is the Bank of England?” wonders Ken Lazzara, head dealer for Easy Forex US Ltd. “The EUR/USD is down 1800 pips off its highs, and everybody is singing a different song now.” Lazzara says the correlation between the euro and crude prices is near 90%. “If we see crude at $100, the EUR/USD could see another 400 pip break, which would put it at 1.36, which is a key Fibonacci retracement level,” he says. But soon rising heating oil demand likely will lift crude and the euro will follow.
“Despite bad payroll numbers, probably the worst in five years, the dollar held up really well,” says Rob Booker, chief currency strategist for Interbank FX. He says the market has priced in one and possibly two interest rate cuts by the European Central Bank (ECB). Currently, interest rates are 4.25% in Europe, 225 basis points higher than in the U.S. Booker says the ECB has justified the rates given rising inflation, but with oil and gold prices declining, any justification for hawkishness is waning. In October, he says the euro will trade between 1.40 and 1.45, but could go as low as 1.35.
